Classic Components’ president, Mike Thomas, offers manufacturers key strategies to ‘bank’ electronic chips, without much capital outlay, to protect against future shortages.
When demand for electronic chips outstrips supply, prices rise, impacting consumers and manufacturers alike. Chip supply can be impacted by factors like trade disputes, geopolitical tensions and disruptions in manufacturing processes. Fluctuations in prices can ripple through the economy, affecting the cost of electronics, vehicles and other high-tech goods.
Recent shortages during the pandemic and fears of China’s ambitions to dominate the industry are spurring fears of future shortages. On the brighter side, experts suggest we are on the precipice of a boom, driven by artificial intelligence, mobile internet, cloud and IoT.
Either scenario raises the specter of potential future shortages or hard to get parts, which has some OEMs and electronics manufacturing services providers working to ‘bank’ a supply of critical chips in preparation.
Classic Components’ president, Mike Thomas, said: “Many companies— particularly those that build critical equipment like medical, military, industrial controls and automotive— are now considering how they can protect themselves from future vulnerability. They experienced serious chip shortages and want to ensure a reliable, ready supply at a reasonable price without tying up capital.”
Many OEMs are receptive to the idea of access to a vetted supply of quality chips. However, few want to commit capital for chips they may not need for years, particularly if owned by equity or publicly traded firms, according to Thomas.
In response, premier independent distributors like Classic Components hold supplies of quality chips, acting as de facto ‘chip banks’. Independent distributors play a critical role when franchised/ authorized distributors can’t supply the required parts, by leveraging their expertise to find alternate sources through regional authorized/ franchised distribution, manufacturer direct or surplus/excess inventories.
To prevent delays, independent distributors can proactively secure inventory without asking for money up front. Thomas explained: “We invest our own capital to secure the chips and hold them in inventory for the customer until required, however long that takes. We keep a certain amount in buffer stock, ship it when needed, and then get paid. In doing so, manufacturers can get the chips they need, when they need it.”
Independent distributors like Classic Components can lock in prices and delivery dates using its network of supply chains and partners for many months at a time. The chips are placed in long-term bond or long-term schedule contracts with applicable service or storage fees. The inventory can be shipped to authorized partners, contract manufacturers, sister companies, and subsidiaries on demand.
This is a unique offering in the independent channel that only the largest, most financially stable distributors are willing or able to offer. Classic Components has been in business for over 40 years. The company can usually deliver parts in two to three weeks that OEMs or authorized distributors may not have access to for 52 weeks or longer.
Classic Components will also stock chips that OEMs acquire through traditional distribution, franchise distribution or authorized distribution channels. Based on customer preferences, the independent distributor can hold all, or some, of the stock and distribute it where needed based on long-term production schedules.
In addition to guaranteeing chip availability, manufacturers may seek to shield themselves from escalating prices caused by component scarcity, which can unpredictably surge in global markets.
Thomas explained: “Manufacturers may want to place a year’s worth of chips on order now. If the price rises and it costs 20 per cent for the same chips six months later, they already have stock for the rest of the year that is price protected.”
For example, Classic Components procures material in all the local markets where they do business so is not bound by regional price constraints. With a comprehensive global network, the independent distributor can make purchases in local markets that currently offer the lowest prices and pass the savings to their customers.
Besides its 60,000ft2 facility in Torrance, California, Classic Components has 12 regional offices in strategic locations throughout the world to support
its global distribution business. The company has nearly 200 employees who specialize in aspects of the business including supply chain, quality, technology and logistics.
To ensure the authenticity and quality of each part, the independent distributor offers a rigorous inspection process of each component received along with timely supply chain management. Classic Components, for example, utilizes a quality management system (QMS) and holds certifications such as AS6081, a requirement for distributors serving the aviation, space and defense industry.
Like a bank, a premier independent distributor can offer a variety of financing options that can facilitate securing the required chips. One example is a ‘buy and sell back’ program for companies with excess inventory.
According to Thomas, many manufacturers are sitting on excess inventory due to stockpiling parts and ordering from multiple sources to ensure delivery. If it is true dead stock, an independent distributor can help liquidate the components while maximizing recovery and get them off the books through various types of arrangements.
Thomas said: “We have a global customer base and lots of information about the materials they use. So, if a manufacturer has excess inventory, we can often find an opportunity to sell it to one of our other customers.”
Classic Components can also list and sell surplus inventory on consignment— with or without taking physical possession of the inventory. The company may even opt to purchase the inventory outright to resell later.
The distributor also offers transition services, which can benefit OEMs holding chips in inventory that will be shipped to third parties such as an EMS that will do the actual manufacturing. In this case, an independent distributor can purchase, warehouse and distribute the chips and later sell the inventory to the third-party—much like a third-party logistics (3PL) operation.
Today, the memory of pandemic related chip shortages and sky-high pricing is fading. However, any number of destabilizing events could tip the global chip supply into a severe shortage: a future pandemic, natural disaster, political tension or conflict. The most destabilizing event for chip supply would be a serious dispute between Taiwan and China.
Some are even predicting a tech boom in the next decades, with automotive, data storage and wireless industries driving the growth. As chip demand rises, OEMs that work withindependent distributors to secure low-cost, quality inventory over the long term will weather the inevitable, unexpected disruptions far better than competitors.